Essays on Reversed Leveraged Buyouts

TARGET CAPITAL STRUCTURE and TRANSITORY DEBT: Evidence from Reverse LBOs

Traditional target structure theories predict that all financing decisions move firms towards target capital structures. On the other hand, transitory debt hypothesis predicts that firms deliberately but temporarily deviate from target capital structures to fund a particular corporate action and then de-lever to re-build debt capacity. In a leveraged buyout, the maximum possible amount of debt is used to acquire the assets or stock of the target firm. This disruption in financial policy provides a laboratory to test the prediction of the transitory debt hypothesis. Our results show that firms quickly reduce their debt ratios to levels near target ratios at the time of the reverse LBO. A minority of firms in the sample increase debt significantly after the reverse LBO. In accordance with the transitory debt hypothesis, these firms value the option to borrow and decrease their debt levels accordingly so that they can preserve the option to borrow for future. When the firms have valuable investment options, they once again issue transitory debt deliberately but temporarily, they move away from their target leverage ratios, use the proceeds from the issue mainly for investment purposes, and they revert back to the target leverage levels gradually.

PRIVATE EQUITY and CORPORATE GOVERNANCE: Evidence from Reverse LBOs

Based on the hypothesis that LBO specialists would design corporate governance mechanisms of portfolio firms, in such a manner that governance structure of the firm would be optimal at the time of the IPO, we investigate the board structure, board committees, ownership structure and executive compensation of reverse leveraged buyout (RLBO) firms. For this purpose, we compare the governance mechanisms of RLBO firms to those of size and book-to-market matched control firms. Our evidence suggests that, compared to the control firms, RLBO firms prefer to be incorporated in Delaware and have unitary boards, have younger board members with shorter tenures, have more financial experts on their boards, have CEOs with shorter tenures, prefer busy board members and busy boards. They also have smaller number of members on their boards, compared to previous findings from earlier decades. In addition, the majority of board members are effectively monitoring directors and the majority of board members on various committees of the boards are independent directors. In addition, compared to control firms, RLBO firms are associated with higher ownership by blockholders, higher total managerial ownership, and lower CEO ownership. Also, LBO specialists hold substantial directorships in the portfolio firms and they own a substantial fraction of shares. Lastly, the evidence suggests that top executives and CEOs of RLBO firms do not receive significantly higher levels of compensation compared to control firms. In terms of the composition of total compensation, RLBO firms usually prefer to pay a higher fraction of total compensation in form of bonuses, and less in the form of stock option grants.

Dissertation Chair: Professor Michael Gombola Ph.D., Department of Finance Committee Member: Associate Professor Jie Cai Ph.D., Department of Finance Committee Member: Associate Professor Naveen Daniel Ph.D., Department of Finance Committee Member: Associate Professor Eliezer Fich Ph.D., Department of Finance Committee Member: Assistant Professor Yoto Yotov Ph.D., Department of Economics